Replacement analysis Mississippi River Shipyards is considering the replacement
ID: 2719519 • Letter: R
Question
Replacement analysis
Mississippi River Shipyards is considering the replacement of an 8-year-old riveting machine with a new one that will increase earnings before depreciation from $30,000 to $44,000 per year. The new machine will cost $87,500, and it will have an estimated life of 8 years and no salvage value. The new machine will be depreciated over its 5-year MACRS recovery period; so the applicable depreciation rates are 20%, 32%, 19%, 12%, 11%, and 6%. The applicable corporate tax rate is 40%, and the firm's WACC is 16%. The old machine has been fully depreciated and has no salvage value.
What is the NPV of the project? Round your answer to the nearest cent.
$
Should the old riveting machine be replaced by the new one?
-Select-YesNoItem 2
Explanation / Answer
Answer:
Answer:
Calculation of depreciation Year Dep rate Machine cost Depreciation 1 20% 87500 17500 2 32% 87500 28000 3 19% 87500 16625 4 12% 87500 10500 5 11% 87500 9625 6 6% 87500 5250 Particulars 1 2 3 4 5 6 7 8 Earnings before dep 14000 14000 14000 14000 14000 14000 14000 14000 Less: Dep 17500 28000 16625 10500 9625 5250 Earning after dep -3500 -14000 -2625 3500 4375 8750 14000 14000 Less: Tax 40% -1400 -5600 -1050 1400 1750 3500 5600 5600 EAT -2100 -8400 -1575 2100 2625 5250 8400 8400 Add: Dep 17500 28000 16625 10500 9625 5250 0 0 OCF 15400 19600 15050 12600 12250 10500 8400 8400 Particulars Years P.V.F (12%) Amount ($) PV ($) Cash flow 0 1 -87500 -87500 1 0.8621 15400 13275.86207 2 0.7432 19600 14565.99287 3 0.6407 15050 9641.897987 4 0.5523 12600 6958.867833 5 0.4761 12250 5832.384439 6 0.4104 10500 4309.643674 7 0.3538 8400 2972.168051 8 0.3050 8400 2562.213837 NPV Net Present value -27380.9692 NO, the old riveting machine should not be replaced by the new one because NPV is negative.